Oil giant BP reported a huge drop in 2009 profits yesterday, but insisted the year had been "very good", with better numbers in the fourth quarter and a marked recovery in production.

The markets remained unconvinced, however, with the energy giant propping up the FTSE 100 after announcing a 45 per cent drop in full-year profits. The group, Europe's biggest oil and gas producer, blamed the plunge in profits on falling energy prices at the start of last year.

Replacement cost profit – the measure typically used by oil companies which strips out gains or losses related to any changes in the value of the company's assets – reached $13.96bn last year, down from $25.59bn in 2008.

The company was eager to draw attention to its fourth-quarter performance, however, which showed a 33 per cent rise in replacement cost profits to $3.45bn.

Tony Hayward, BP's chief executive, said 2009 had been "very good", with the company exceeding many of the targets set out at the beginning of the year. "These results provide the clearest demonstration of the progress we have made and the momentum we have established in growing our business and making it more efficient," he said.

Despite stronger commodity prices, which led to the improved performance in the fourth quarter, the numbers missed market expectations. "After a strong third quarter, expectations were quite high for the fourth quarter outcome," said Tony Shepard, an analyst at Charles Stanley.

"These high expectations have been dashed by today's figures, which confirmed the difficult trading in the global refining industry. Nevertheless, the operating performance remains good and, in our opinion, the cash flow performance was encouraging."

The company declared itself pleased with its 4 per cent increase in oil and gas production and its 17th successive year of increasing reserves.

However, Mr Haywood conceded that output would be likely to fall this year. "Upstream production had been very strong in 2009," he said. "[But] 2010 production is expected to be slightly lower, reflecting the benefit in 2009 of the absence of a significant hurricane season. This expected level of 2010 production is in line with the guidance given to analysts in BP's strategy update in March last year."

Analysts said that while BP's profit numbers had disappointed, the market's reaction, which sent the stock down by 3.8 per cent, was overdone.

"We believe the drop in the shares is unjustified," said Jonathan Jackson, the head of equities at Killik & Co. "While it is disappointing the results came in below consensus, the market had clearly got a bit ahead of itself. The muted production guidance for 2010 had already been communicated to the market at the group's strategy update last March. While we don't expect the level of cost-cutting to continue at the same pace as last year, we believe there is still plenty for the group to go for."

Mr Haywood said his "confidence in the longer term has been reinforced", by the projects started in 2009. In June last year BP and China's CNPC won the right to expand production from the huge Rumaila oilfield in Iraq, which was initially discovered by the company in 1953 before being nationalised by Saddam Hussein.

BP is planning to increase production from the field, which is estimated to hold as much as 15 per cent of Iraq's total oil reserves, to 2.85 million barrels a day by the second half of the decade.

BP's improved financial results in the fourth quarter were helped by a recovery in oil prices to more than $70 a barrel over the last few months after the price dropped to less than $40 a barrel in January last year in the wake of the financial crisis. Oil had previously spiked at $147 a barrel in July 2008.

BP's rival Royal Dutch Shell is scheduled to report its 2009 results tomorrow.